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Hi bmann025,
Thanks for the clarification. I have went to Luk Fook's thread to look at your posts again.
(1) It looks like you have added the hedges gain/losses to the actual fiscal year's profit, and then the aggregation (avg and std dev) to achieve your conclusion. I suspect it is more nuanced than that. I reproduce CTF's hedges and inventories turnover from its AR23 as below:
Gold loans are settled at maturity which is usually in 1 to 6 months from date of inception and any fair value change is immediately recognised in profit or loss
Inventory turnover period (day) 299 381 312 272 294 (2019 to 2023)
So hedges are closed over short duration, while the time to mfg/sell the jewellery is pretty long at 8-11 months. As such, adding the hedge gain/loss and profit for the same fiscal year is probably not accurate due to the longer duration required to sell the jewellery and record the revenue. There is a ~6-10months' kind of time lag and so hedging gain/loss for this year needs to be paired with next year's profit, rather than the same year as you have done. Looking at the years before covid-19 lockdowns messed Mgt estimates, it does seem that for both CTF/LF: If this FY had hedging gains, the corresponding FY would have lower profit. And vice versa.
(2) You have mentioned that book value of the inventory fluctuates with the price of gold. That is not accurate. I have reproduced their COGS accounting principle as below:
On the other hand, the gold inventory would not be revalued at market price as it is measured at weighted average cost, unless an impairment indicator exists
Revenue fluctuates with the price of gold but its COGS is fixed based on the earlier cost to buy/produce them. This is why when gold prices rise and sales is kept constant, they will have higher profitability 10 months down the road when they sell the gold jewellery by recording a higher revenue due to higher gold price, but record a lower COGS due to lower gold price earlier.
(3) From my last AR check on both CSS/CTF, both of them have total borrowings that are ~40-60% of equity, and majority are bullion loans for hedging purposes. If we look at their balance sheet composition, the majority is inventory. So from another angle, we can say that they geared up 40-60% to expand their equity base by 40-60% and allow more working capital (in this case inventories) to support business expansion. So besides hedging, their gearing also helps in opening more branches and showing display products to sell.
Thanks for the clarification. I have went to Luk Fook's thread to look at your posts again.
(1) It looks like you have added the hedges gain/losses to the actual fiscal year's profit, and then the aggregation (avg and std dev) to achieve your conclusion. I suspect it is more nuanced than that. I reproduce CTF's hedges and inventories turnover from its AR23 as below:
Gold loans are settled at maturity which is usually in 1 to 6 months from date of inception and any fair value change is immediately recognised in profit or loss
Inventory turnover period (day) 299 381 312 272 294 (2019 to 2023)
So hedges are closed over short duration, while the time to mfg/sell the jewellery is pretty long at 8-11 months. As such, adding the hedge gain/loss and profit for the same fiscal year is probably not accurate due to the longer duration required to sell the jewellery and record the revenue. There is a ~6-10months' kind of time lag and so hedging gain/loss for this year needs to be paired with next year's profit, rather than the same year as you have done. Looking at the years before covid-19 lockdowns messed Mgt estimates, it does seem that for both CTF/LF: If this FY had hedging gains, the corresponding FY would have lower profit. And vice versa.
(2) You have mentioned that book value of the inventory fluctuates with the price of gold. That is not accurate. I have reproduced their COGS accounting principle as below:
On the other hand, the gold inventory would not be revalued at market price as it is measured at weighted average cost, unless an impairment indicator exists
Revenue fluctuates with the price of gold but its COGS is fixed based on the earlier cost to buy/produce them. This is why when gold prices rise and sales is kept constant, they will have higher profitability 10 months down the road when they sell the gold jewellery by recording a higher revenue due to higher gold price, but record a lower COGS due to lower gold price earlier.
(3) From my last AR check on both CSS/CTF, both of them have total borrowings that are ~40-60% of equity, and majority are bullion loans for hedging purposes. If we look at their balance sheet composition, the majority is inventory. So from another angle, we can say that they geared up 40-60% to expand their equity base by 40-60% and allow more working capital (in this case inventories) to support business expansion. So besides hedging, their gearing also helps in opening more branches and showing display products to sell.
